Chesapeake Energy Corp.'s announcement this week that it will hire a new independent director promises to bring the company more in line with a growing trend toward more independent oversight boards, industry observers said Wednesday.
“The board is to be the watchdog of the company. It's hard for that to happen when the person who is in charge of overseeing the CEO is in fact the CEO,” said Maclyn Clouse, a professor of finance at the University of Denver's Daniels College of Business.
While naming a new chairman is a positive step, Clouse said it matters who is selected for the new role.
“It's an excellent move if this person really is independent,” Clouse said. “It can't be a situation where the CEO steps down as chairman and his brother-in-law becomes the new chairman. We've seen that kind of thing in the past at other companies.”
Chesapeake has said it will seek guidance from its largest shareholders before naming the new chairman.
The 2002 Sarbanes-Oxley Act recommended companies separate the roles of chairman and CEO, but there is no requirement that they do so.
While many companies have been slow to adopt the recommendation, corporate governance is slowly changing, said David Lei, associate professor of management and organizations at Southern Methodist University's Cox School of Business in Dallas.
“I think boards are becoming more active. They are no longer the private clubs they were as recently as 20 years ago,” Lei said. “More activist boards impose more discipline at the highest levels of the companies.”
Company founders tend to hold on to the shared title of chairman and CEO, but that's not always in the best interest of shareholders, Lei said.
“When you're looking at a growing business, you want the founder as close to the top as you can because you want that entrepreneurial energy,” he said. “But when a company matures, you want the chairman more focused on quality and customer service.”
Moving the founder out of the chairman role in some cases can help the company grow faster and stronger,” Clouse said.
“In many cases, the founder is someone who has a lot of expertise in whatever the business might be,” he said. “One thing that happens with success and growth is that larger companies face more and more challenges. At some point in time, and it's hard for the founder to admit this: sometimes the firm and its challenges may outgrow the managerial expertise of the founder. In that case, putting in someone who has experience in this larger size company and with larger complexities could be better off for the firm and its shareholders.”
Lei said he also is pleased with the direction Chesapeake now is moving and hopes it sets an example for other energy companies.
“Typically, energy company boards are a very closed, informal club environment,” Lei said. “If boards at Chesapeake and others start looking more like consumer companies, there would be a lot fewer interrelationships among the companies. It's going to be interesting to see how that comes out.”